UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
Commission File Number 000-19514
Gulfport Energy Corporation
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 73-1521290
- ----------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
14313 North May Avenue, Suite 100
Oklahoma City, Oklahoma 73134
(405) 848-8807
----------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
Common Stock, $0.01 par value None
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
1
GULFPORT ENERGY CORPORATION
TABLE OF CONTENTS
FORM 10-QSB QUARTERLY REPORT
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheet at September 30, 2003 (unaudited) 4
Statements of Operations for the Three and Nine
Month Periods Ended September 30, 2003 and 2002 (unaudited) 5
Statements of Common Stockholders' Equity for
the Nine Months Ended September 30, 2003 and 2002 (unaudited) 6
Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 (unaudited) 7
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Position and Results of Operations 15
Item 3 Controls and Procedures 25
PART II OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 2 Changes in Securities 26
Item 3 Defaults upon Senior Securities 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 28
2
GULFPORT ENERGY CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
September 30, 2003 and 2002
Forming a part of Form 10-QSB Quarterly Report to the
Securities and Exchange Commission
This quarterly report on Form 10-QSB should be read in conjunction with Gulfport
Energy Corporation's Annual Report on Form 10-KSB for the year ended December
31, 2002.
3
GULFPORT ENERGY CORPORATION
BALANCE SHEET
September 30,
2003
--------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,496,000
Accounts receivable, net of allowance for doubtful 1,645,000
accounts of $239,000
Accounts receivable - related party 291,000
Prepaid expenses and other current assets 114,000
-------------
Total current assets 3,546,000
-------------
Property and equipment:
Oil and natural gas properties 127,092,000
Other property and equipment 1,896,000
Accumulated depletion, depreciation, amortization (75,970,000)
-------------
Property and equipment, net 53,018,000
-------------
Other assets 3,002,000
------------
Total assets $ 59,566,000
=============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 3,943,000
Accrued payable - royalty audit 386,000
Asset retirement obligation - current 480,000
Current maturities of long-term debt 1,623,000
-------------
Total current liabilities 6,432,000
-------------
Asset retirement obligation - long-term 7,186,000
Redeemable 12% cumulative preferred stock, Series A,
$.01 par value, with a redemption and liquidation
value of $1,000 per share; 15,000 authorized,
11,625 issued and outstanding at September 30, 2003 11,625,000
-------------
Total liabilities 25,243,000
-------------
Commitments and contingencies
Preferred stock, $.01 par value; 4,985,000 authorized
at September 30, 2003, none issued -
Common stockholders' equity:
Common stock - $.01 par value, 20,000,000 authorized,
10,146,566 issued and outstanding at September 30, 2003 101,000
Paid-in capital 84,192,000
Accumulated deficit (49,970,000)
-------------
Total stockholders' equity 34,323,000
-------------
Total liabilities and stockholders' equity $ 59,566,000
=============
See accompanying notes to financial statements.
4
GULFPORT ENERGY CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Gas sales $ 99,000 $ 92,000 $ 351,000 $ 280,000
Oil and condensate sales 3,856,000 3,655,000 12,112,000 9,253,000
Other income 45,000 2,000 156,000 236,000
----------- ------------ ----------- -----------
4,000,000 3,749,000 12,619,000 9,769,000
----------- ------------ ----------- -----------
Costs and expenses:
Operating expenses 1,581,000 1,240,000 4,395,000 3,630,000
Production taxes 560,000 414,000 1,515,000 1,061,000
Depreciation, depletion,
and amortization 1,057,000 871,000 3,184,000 2,459,000
General and administrative 385,000 428,000 1,346,000 1,255,000
----------- ------------ ----------- -----------
3,583,000 2,953,000 10,440,000 8,405,000
----------- ------------ ----------- -----------
INCOME FROM OPERATIONS: 417,000 796,000 2,179,000 1,364,000
----------- ------------ ----------- -----------
OTHER (INCOME) EXPENSE:
Accretion expense 75,000 - 223,000 -
Interest expense 20,000 3,000 29,000 109,000
Interest expense - preferred
stock 429,000 - 429,000 -
Interest income (9,000) (16,000) (26,000) (48,000)
----------- ------------ ----------- -----------
515,000 (13,000) 655,000 61,000
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (98,000) 809,000 1,524,000 1,303,000
INCOME TAX EXPENSE (BENEFIT):
Current - 324,000 610,000 521,000
Deferred - (324,000) (610,000) (521,000)
----------- ------------ ----------- -----------
- - - -
----------- ------------ ----------- -----------
NET INCOME (LOSS) BEFORE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ (98,000) $ 809,000 $ 1,524,000 $ 1,303,000
Cumulative effect of change in
accounting principle - - 270,000 -
----------- ------------ ----------- -----------
NET INCOME (LOSS) (98,000) 809,000 1,794,000 1,303,000
Less: Preferred stock dividends - (356,000) (838,000) (709,000)
----------- ------------ ----------- -----------
NET INCOME (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ (98,000) $ 453,000 $ 956,000 $ 594,000
=========== =========== =========== ==========
NET INCOME (LOSS) PER COMMON
SHARE - BASIC:
Per common share before effect of
change in accounting principle $ (0.01) $ 0.04 $ 0.07 $ 0.06
Effect per common share of
change in accounting principle - - 0.02 -
----------- ------------ ----------- -----------
$ (0.01) $ 0.04 $ 0.09 $ 0.06
=========== ============ =========== ===========
NET INCOME (LOSS) PER COMMON
SHARE - DILUTED:
Per common share before effect of
change in accounting principle $ (0.01) $ 0.04 $ 0.07 $ 0.06
Effect per common share of change
in accounting principle - - 0.02 -
----------- ------------ ----------- -----------
$ (0.01) $ 0.04 $ 0.09 $ 0.06
=========== ============ =========== ===========
See accompanying notes to financial statements.
5
GULFPORT ENERGY CORPORATION
Statements of Common Stockholders' Equity
(Unaudited)
Additional
Common Stock Paid-in Accumulated
--------------------
Shares Amount Capital Deficit
---------- -------- ----------- -------------
Balance at December 31, 2001 10,146,566 $101,000 $84,192,000 $(50,301,000)
Net income - - - 1,303,000
Preferred stock dividends - - - (709,000)
---------- -------- ----------- ------------
Balance at September 30, 2002 10,146,566 $101,000 $84,192,000 $(49,707,000)
========== ======== =========== ============
Balance at December 31, 2002 10,146,566 $101,000 $84,192,000 $(50,926,000)
Net income - - - 1,794,000
Preferred stock dividends - - - (838,000)
---------- -------- ----------- -----------
Balance at September 30, 2003 10,146,566 $101,000 $84,192,000 $(49,970,000)
========== ======== =========== ============
See accompanying notes to financial statements.
6
GULFPORT ENERGY CORPORATION
Statements of Cash Flows
(Unaudited)
For the Nine Months
Ended September 30,
--------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 1,794,000 $ 1,303,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of change in
accounting principle (270,000) -
Accretion of discount 223,000 -
Interest expense - preferred stock 429,000 -
Depletion, depreciation and amortization 3,178,000 2,446,000
Amortization of debt issuance costs 6,000 13,000
Changes in operating assets and liabilities:
Decrease in insurance settlement receivable 2,510,000 -
Decrease in accounts receivable 188,000 507,000
(Increase) in accounts receivable -
related party (233,000) 65,000
Decrease in prepaid expenses 91,000 36,000
Increase in accounts payable
and accrued liabilities 1,143,000 1,545,000
------------ ------------
Net cash provided by operating activities 9,059,000 5,915,000
------------ ------------
Cash flows from investing activities:
(Additions) to cash held in escrow (177,000) (180,000)
(Additions) to other property, plant and equipment (24,000) (9,000)
(Additions) to oil and gas properties (9,252,000) (7,545,000)
Expenditures related to oil and gas
properties due to hurricane (702,000) -
------------ ------------
Net cash used in investing activities (10,155,000) (7,734,000)
------------ ------------
Cash flows from financing activities:
Borrowings on note payable 1,500,000 -
Principal payments on borrowings (17,000) (1,122,000)
Proceeds from issuance of preferred
stock - 6,029,000
------------ ------------
Net cash provided by financing activities 1,483,000 4,907,000
------------ ------------
Net increase in cash and cash equivalents 387,000 3,088,000
Cash and cash equivalents at beginning of period 1,109,000 1,077,000
------------ ------------
Cash and cash equivalents at end of period $ 1,496,000 $ 4,165,000
============ ============
Supplemental disclosure of cash flow information:
Interest payments $ 29,000 $ 31,000
============ ============
Supplemental disclosure of non-cash transactions:
Repayment of note payable to related party
through issuance of Series A Preferred Stock $ - $ 3,000,000
============ ============
Repayment of accrued interest due on note
payable to related party through issuance
of Series A
Preferred Stock $ - $ 263,000
============ ============
Payment of Series A Preferred Stock dividends
through issuance of Series A Preferred Stock $ 838,000 $ 709,000
============ ============
See accompanying notes to financial statements.
7
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
These condensed financial statements have been prepared by Gulfport Energy
Corporation (the "Company" or "Gulfport") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission, and reflect all
adjustments, which are in the opinion of management, necessary for a fair
statement of the results for the interim periods, on a basis consistent with the
annual audited financial statements. All such adjustments are of a normal
recurring nature. Certain information, accounting policies, and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and the
summary of significant accounting policies and notes thereto included in the
Company's most recent annual report on Form 10-KSB.
1. ACCOUNTS RECEIVABLE - RELATED PARTY
Included in the accompanying September 30, 2003 balance sheet are amounts
receivable from entities that have similar controlling interests as those
controlling the Company. These receivables represent amounts billed by the
Company for general and administrative functions performed by Gulfport's
personnel on behalf of the related party companies during 2002 and 2003.
Gulfport has reduced its corresponding expenses for the three and nine month
periods ended September 30, 2003 by $181,000 and $399,000, respectively, billed
to the companies for performance of these services.
2. PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated
depreciation, depletion and amortization are as follows at September 30, 2003:
September 30, 2003
------------------
Oil and gas properties $ 127,092,000
Office furniture and fixtures 1,419,000
Building 217,000
Land 260,000
----------------
Total property and equipment 128,988,000
Accumulated depreciation, depletion,
amortization and impairment reserve (75,970,000)
----------------
Property and equipment, net $ 53,018,000
================
8
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. OTHER ASSETS
Other assets consist of the following at September 30, 2003:
September 30, 2003
------------------
Plugging and abandonment escrow account
on the WCBB properties (Note 8) $ 2,691,000
CD's securing letter of credit 200,000
Deposits 111,000
----------------
$ 3,002,000
================
4. LONG-TERM DEBT
A break down of long-term debt is as follows at September 30, 2003:
September 30, 2003
------------------
Building loan $ 123,000
Less - current maturities of long term debt 123,000
----------------
Debt reflected as long term $ -
================
The building loan of $123,000 relates to a building in Lafayette,
Louisiana, purchased in 1996 to be used as the Company's Louisiana headquarters.
The building is 12,480 square feet with approximately 6,180 square feet of
finished office area and 6,300 square feet of warehouse space. This building
allows the Company to provide office space for Louisiana personnel, have access
to meeting space close to the fields and to maintain a corporate presence in
Louisiana.
5. REVOLVING LINE OF CREDIT
The Company maintains a line of credit with Bank of Oklahoma, under which
the Company may borrow up to $2,300,000. Amounts borrowed under the line bear
interest at Chase Manhattan Prime plus 1%, with payments of interest on
outstanding balances due monthly. Any principal amounts borrowed under the line
will be due on July 1, 2004. As of September 30, 2003, $1,500,000 had been
borrowed under this line.
6. CASTEX BACK-IN
Gulfport sold its interest in the Bayou Penchant, Bayou Pigeon, Deer Island
and Golden Meadow fields to Castex Energy 1996 Limited Partnership effective
April 1, 1998 subject to a 25% reversionary interest in the partnership after
Castex had received 100% of the initial investment. Castex informed Gulfport
9
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
that the investment had paid out effective September 1, 2001. In lieu of a 25%
interest in the partnership, Gulfport elected to take a proportionately reduced
25% working interest in the properties. During March 2002, the Company received
approximately $220,000 from Castex which the Company believes consists of sales
income for the period after payout net of operating expenses, although the
Company has not received confirmation of such. As a result, this amount
received has been included in the accompanying statement of income for the nine
months ended September 30, 2002 as "Other Income". The Company received an
additional $66,000 from Castex in March of 2003, which is also included in the
accompanying statement of income for the nine months ended September 30, 2003 as
"Other Income".
7. EARNINGS PER SHARE
A reconciliation of the components of basic and diluted net income (loss)
per common share is presented in the table below:
For the Three Months Ended September 30,
------------------------------------------------------------
2003 2002
---------------------------- -----------------------------
Per Per
Income Shares Share Income Shares Share
-------- ---------- ------ ---------- --------- ------
Basic:
Income (loss) before effect
of change in accounting
principle $(98,000) $ 809,000
Less: preferred stock
dividends - (356,000)
-------- ----------
(98,000) 10,146,566 $(0.01) 453,000 10,146,566 $0.04
Effect of change in
accounting principle - 10,146,566 - - 10,146,566 -
-------- ------ ---------- -----
$(98,000) 10,146,566 $(0.01) $ 453,000 10,146,566 $0.04
======== ====== =====
Effect of dilutive securities:
Stock options 205,101 232,904
---------- ----------
Diluted:
Income (loss) before effect
of change in accounting
principle $(98,000) $ 809,000
Less: preferred stock
dividends - (356,000)
-------- ----------
(98,000) 10,351,667 $(0.01) 453,000 10,379,470 $0.04
Effect of change in
accounting principle - 10,351,667 - - 10,379,470 -
-------- ------ ---------- -----
$(98,000) $(0.01) $ 453,000 $0.04
======== ====== ========== =====
10
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For the Nine Months Ended September 30,
--------------------------------------------------------------
2003 2002
------------------------------ -----------------------------
Per Per
Income Shares Share Income Shares Share
-------- ---------- ------ ---------- --------- ------
Basic:
Income before effect of
change in accounting
principle $1,524,000 $1,303,000
Less: preferred stock
dividends (838,000) (709,000)
---------- ----------
686,000 10,146,566 $0.07 594,000 10,146,566 $0.06
Effect of change in
accounting principle 270,000 10,146,566 0.02 - 10,146,566 -
---------- ----- ---------- -----
$ 956,000 $0.09 $ 594,000 $0.06
========== ===== ========== =====
Effect of dilutive securities:
Stock options 174,431 281,726
---------- ----------
Diluted:
Income before effect of
change in accounting
principle $1,524,000 $1,303,000
Less: preferred stock
dividends (838,000) (709,000)
---------- ----------
686,000 10,320,997 $0.07 594,000 10,428,292 $0.06
Effect of change in
accounting principle 270,000 10,320,997 0.02 - 10,428,292 -
---------- ----- ---------- -----
$ 956,000 $0.09 $ 594,000 $0.06
========== ===== ========== =====
Common stock equivalents not included in the calculation of 2003 diluted
earnings per share above consists of 2,322,893 warrants issued in connection
with the Company's Private Placement Offering which took place during March 2002
as discussed in Note 9. Also not included in the calculation of 2003 and 2002
diluted earnings per share are 108,625 warrants issued in connection with the
Company's revolving line of credit with Gulfport Funding, which was retired
during March 2002. These potential common shares were not considered in the
calculation due to their anti-dilutive effect during the periods presented.
8. COMMITMENTS
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Company agreed to contribute approximately $18,000 per
month through March, 2004, to a plugging and abandonment trust and the
obligation to plug a minimum of 20 wells per year for 20 years commencing March
11, 1997. Texaco retained a security interest in production from these
properties until abandonment obligations to Texaco have been fulfilled. As of
11
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003, the plugging and abandonment trust totaled $2,691,000
including interest received during 2003 of approximately $11,000.
Gulfport fulfilled its yearly plugging commitment of 20 wells at WCBB for
the twelve-month period ending March 31, 2003 during the year ended December
31, 2002.
Office Lease
The Company leases 12,035 square feet of office space in Oklahoma City.
This lease commenced in November of 2002 and has a 60 month term. Payments due
under the lease during its term are as follows:
For the period ended September 30,
----------------------------------
2004 $ 217,000
2005 217,000
2006 217,000
2007 216,000
2008 18,000
----------------
$ 885,000
================
9. PRIVATE PLACEMENT OFFERING
In March 2002, the Company commenced a Private Placement Offering of $10
million dollars consisting of 10,000 Units. Each Unit consists of (i) one (1)
share of Cumulative Preferred Stock, Series A, of the Company (Preferred) and
(ii) a warrant to purchase up to 250 shares of common stock, par value $0.01 per
share. Dividends accrue on the Preferred prior to the Mandatory Redemption Date
(as defined below) at the rate of 12% per annum payable quarterly in cash or, at
the option of the Company for a period not to exceed two (2) years from the
Closing Date, payable in whole or in part in additional shares of the Preferred
based on the Liquidation Preference (as defined below) of the Preferred at the
rate of 15% per annum. No other dividends shall be declared or shall accrue on
the Preferred. To the extent funds are legally available, the Company is
obligated to declare and pay the dividends on the Preferred. The Warrants have
a term of ten (10) years and an exercise price of $4.00. The Company is
required to redeem the Preferred on the fifth anniversary of the first issuance
and the Company may at its sole option, choose to redeem the Preferred at any
time before the expiration of the five years. Because of the mandatorily
redeemable nature of the Preferred, it is presented as part of total liabilities
in the accompanying balance sheet.
Two-thirds of the Preferred Stockholders can affect any Company action,
which would effect their preference position. The Preferred cannot be sold or
transferred by its holders and the Company must use its best efforts to register
with the Securities and Exchange Commission ("SEC") the common stock issued in
connection with the exercise of the Warrants or, if possible, piggyback the
issued common stock if the Company participates in a public offering with the
SEC.
The Offering was made available to stockholders and affiliates of the
Company as of December 31, 2001 who were known to be accredited investors by the
Company. Purchasers were able to participate up to their pro rata share of
ownership in the Company as of December 31, 2001. The Offering's initial closing
12
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
began March 29, 2002 and continued until April 15, 2002, with a total
subscription of $9,292,000 or 9,291.85 units.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3.0 million dollar loan along with the accumulated
interest due from the Company for 3,262.98 units. Additionally, on March 29,
2002 entities controlled by the majority shareholder initially funded a share of
the Preferred Offering in the amount of $2,738,000.
10. DIVIDENDS ON SERIES A PREFERRED STOCK
As discussed in Note 9, the Company may, at its option, accrue additional
shares of Preferred for the payment of dividends at a rate of 15% per annum
rather than accrue cash dividends at a rate of 12% per annum during the initial
two years following the closing date of its Offering. The Company has chosen to
do such for the nine-month period ended September 30, 2003 and has therefore
issued additional shares totaling $1,267,000 at September 30, 2003 related to
the Preferred Stock Series A shares issued and outstanding during that time
period. These dividends were calculated based upon the Preferred's $1,000 per
share redemptive value and are reflected as "Series A preferred stock" in the
accompanying balance sheet. As a result of the adoption of FAS 150, the
dividends issued as additional shares for the three-month period ended September
30, 2003, are shown as interest expense in the accompanying statement of
operations.
11. NEW ACCOUNTING PRINCIPLES
SFAS No. 143
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which requires the Company to record a liability equal to the fair value
of the estimated cost to retire an asset. The asset retirement liability is
recorded in the period in which the obligation meets the definition of a
liability, which is generally when the asset is placed into service. When the
liability is initially recorded, the Company will increase the carrying amount
of the related long-lived asset by an amount equal to the original liability.
The liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related long-lived asset. Any
difference between costs incurred upon settlement of an asset retirement
obligation and the recorded liability will be recognized as a gain or loss in
the Company's earnings. The asset retirement obligation is based on a number of
assumptions requiring professional judgment. The Company cannot predict the
type of revisions to these assumptions that will be required in future periods
due to the availability of additional information, including prices for oil
field services, technological changes, governmental requirements and other
factors. Upon adoption of SFAS No. 143, the Company recorded a net benefit of
$.27 million as the cumulative effect of a change in accounting principle. The
non-cash transition adjustment increased oil and natural gas properties and
asset retirement obligations by $7.59 million and $7.37 million, respectively,
and decreased accumulated depreciation by $.05 million.
The asset retirement obligation recognized by the Company at September 30,
2003, relates to the estimated costs to dismantle and abandon its investment in
producing oil and gas properties and the related facilities. Of the total asset
retirement liability, $480,000 that has been classified as short-term is the
estimated portion of the total liability to be settled during the next year as
13
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
the Company meets its plugging and abandonment requirements as discussed in Note
8.
The pro forma asset retirement obligations as of January 1, 2002, March 31,
2002, June 30, 2002, and September 30, 2002, were $7.05 million, $7.13 million,
$7.21 million, and $7.29 million respectively. Pro forma net income for the
period September 30, 2002, assuming SFAS No. 143 had been applied retroactively,
is shown in the following table:
Three Months Ended Nine Months Ended
September 30, 2002
--------------------------------------
Net income available to common stockholders -
As reported $ 453,000 $ 594,000
Pro forma 374,000 959,000
Net income per common share -
As reported, basic $ 0.04 $ 0.06
Pro forma, basic 0.04 0.09
As reported, diluted 0.04 0.06
Pro forma, diluted 0.04 0.09
SFAS No. 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or as an asset in some circumstances). Many of
those instruments were previously classified as equity. SFAS No. 150 is
generally effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company recorded a liability related
to the Series A Preferred Stock of $11,625,000. Previously, the Series A
Preferred Stock had been classified on the balance sheet between total
liabilities and equity. This amount represents the 11,625 preferred shares
issued and outstanding as of September 30, 2003, at the redemption and
liquidation value of $1,000 per share. In the opinion of management, the $1,000
per share redemption and liquidation value approximates fair value. The shares
are mandatorily redeemable on the fifth anniversary of the first issuance of
Series A Preferred Stock.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL POSITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-QSB includes "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All
statements, other than statements of historical facts, included in this Form
10-QSB that address activities, events or developments that Gulfport Energy
Corporation ("Gulfport" or the "Company"), a Delaware corporation, expects or
anticipates will or may occur in the future, including such things as estimated
future net revenues from oil and gas reserves and the present value thereof,
future capital expenditures (including the amount and nature thereof), business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of the Company's business and operations, plans, references
to future success, references to intentions as to future matters and other such
matters are forward-looking statements. These statements are based on certain
assumptions and analyses made by the Company in light of its experience and its
perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties; general economic, market or business conditions; the
opportunities (or lack thereof) that may be presented to and pursued by the
Company; competitive actions by other oil and gas companies; changes in laws or
regulations; and other factors, many of which are beyond the control of the
Company. Consequently, all of the forward-looking statements made in this Form
10-QSB are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by the Company
will be realized, or even if realized, that they will have the expected
consequences to or effects on the Company or its business or operations.
The following discussion is intended to assist in an understanding of the
Company's financial position as of September 30, 2003 and its results of
operations for the nine-month periods ended September 30, 2003 and 2002. The
Financial Statements and Notes included in this report contain additional
information and should be referred to in conjunction with this discussion. It
is presumed that the readers have read or have access to Gulfport Energy
Corporation's 2002 annual report on Form 10-KSB.
Overview
Gulfport is an independent oil and gas exploration and production company
with properties located in the Louisiana Gulf Coast. Gulfport has a market
enterprise value (the Company's diluted shares multiplied by the trading price
plus long-term debt less cash and short-term investments on a given day) of
approximately $45.2 million dollars on November 6, 2003 and generated EBITDA
(earnings before interest, taxes and depletion, depreciation and amortization)
of $5.4 million and $3.9 million dollars for the nine months ended September 30,
2003 and 2002, respectively.
As of January 1, 2003, the Company had in excess of 26.1 MMBOE proved
reserves with a present value (discounted at 10%) of estimated future net
reserves of $245 million dollars.
15
Gulfport is actively pursuing further development of its properties in
order to fully exploit its reserves. The Company has a substantial portfolio of
low risk developmental projects for the next several years providing the
opportunity to increase production and cash flow. Gulfport's developmental
program is designed to reach the Company's high impact, higher potential rate of
return prospects through the penetration of several producing horizons.
Additionally, Gulfport owns 3-D seismic data, which along with the
Company's technical expertise, will be used to identify exploratory prospects
and test undrilled fault blocks in its existing fields.
The Company's operations are concentrated in two fields: West Cote Blanche
Bay and the Hackberry Fields. In addition, during the first quarter of 2002,
the Company backed in to a working interest in the Bayou Penchant, Bayou Pigeon,
Deer Island and Golden Meadow fields operated by Castex Energy.
West Cote Blanche Bay
Background
West Cote Blanche Bay ("WCBB") Field lies approximately five miles off the
coast of Louisiana primarily in St. Mary's Parish in a shallow bay, with water
depths averaging eight to ten feet. WCBB overlies one of the largest salt dome
structures in the Gulf Coast. The field is characterized by a piercement salt
dome, which created traps from the Pleistocene through the Miocene. The
relative movements affected deposition and created a complex system of fault
traps. The compensating fault sets generally trend NW-SE and are intersected by
sets having a major radial component. Later-stage movement caused extension
over the dome and a large graben system (a downthrown area bounded by normal
faults) was formed. There are over 100 distinct sandstone reservoirs recognized
throughout most of the field and nearly 200 major and minor discrete intervals
have been tested. Within almost 900 wellbores that have been drilled to date in
the field, over 4,000 potential zones have been penetrated. The sands are
highly porous and permeable reservoirs primarily with a strong water drive.
WCBB is a structurally and stratigraphically complex field. All of the PUD
locations at WCBB are adjacent to faults and abut at least one fault. Gulfport's
Proved Undeveloped (PUD) drilling program is designed to penetrate each PUD trap
with a new wellbore in a structurally optimum position, usually very close to
the fault seal. The majority of these wells are directionally drilled using
steering tools and downhole motors. The tolerance for error in getting near the
fault is low, so the complex faulting does introduce a risk factor of crossing
the fault before encountering the zone of interest, which could result in part
or all of the zone being absent in the borehole. This in turn can result in
lower than expected or zero reserves for that zone. The new wellbores eliminate
the mechanical risk associated with trying to produce the zone from an old
existing wellbore, while the wellbore locations are situated so as to more
efficiently drain each reservoir. The vast majority of the PUD targets are
up-dip offsets to wells which produced from a sub-optimum position within a
particular zone. Gulfport's current PUD drilling schedule calls for the
drilling of 171 wells, starting in 2003 with 18 wells and continuing through
2011. All costs for the directional drilling has been figured into the overall
well cost budget.
As of September 30, 2003, there have been 880 wells drilled at WCBB, and of
these 45 are currently producing, 292 are shut-in and 5 are utilized as salt
16
water disposal wells. The balance of the wells (or 538) have been plugged and
abandoned.
Activity for the Quarter Ended September 30, 2003
Through the month ended September 30, 2003, Gulfport recompleted two wells
at West Cote Blanche Bay Field that yielded initial total gross production of 41
barrels of oil per day.
During September 2003, Gulfport's net daily production in this field
averaged 1,426 barrels of oil.
Future Activity
In July 2003, Gulfport was notified by a subsidiary of Shell Western
Exploration and Production, Inc. ("Shell") that the Shell pipeline that
transported the oil from the production facility at West Cote Blanche Bay to the
purchaser was being deactivated. Currently, the Company is using a barge to
transport the oil production to the purchaser. During the fourth quarter of
2003, Gulfport will install a 23,000 barrel oil storage barge.
Gulfport has received regulatory approval to drill seven new wells at West
Cote Blanche Bay and anticipates commencing drilling activity during the fourth
quarter of 2003. These wells will have total depths ranging from 2,500' to
6,300'. The Company also plans on performing several recompletions and workovers
during the fourth quarter of 2003 or the first quarter of 2004 at West Cote
Blanche Bay. Gulfport has recently received regulatory approval to convert an
existing inactive well to a salt-water disposal well and plans to commence the
work before the end of 2003. In November 2003, Gulfport installed a vapor
recovery unit, which reduces emissions from the production facility and provided
a slight increase in gas production.
Hackberry Fields
Background
The Hackberry fields are located along the shore of Lake Calcasieu in
Cameron Parish, Louisiana. The Hackberry Field is a major salt intrusive
feature, elliptical in shape as opposed to a classic "dome," divided into East
and West field entities by a saddle. Structurally, Gulfport's East Hackberry
acreage is located on the eastern end of the Hackberry salt ridge. There are
over 30 pay zones at this field. The salt intrusion formed a series of
structurally complex and steeply dipping fault blocks in the Lower Miocene and
Oligocene age rocks. These fault blocks serve as traps for hydrocarbon
accumulation. Gulfport's wells currently produce from perforations found between
5,100' and 12,200'.
The East Hackberry field was discovered in 1926 by Gulf Oil Company (now
Chevron Corporation) by a gravitational anomaly survey. The massive shallow salt
stock presented an easily recognizable gravity anomaly indicating a productive
field. Initial production began in 1927 and has continued to the present. The
estimated cumulative oil and condensate production through 1999 was 111 million
barrels of oil with casinghead gas production being 60 billion cubic feet of
gas. There have been a total of 170 wells drilled on Gulfport's portion of the
field with 14 having current daily production; five produce intermittently; 71
wells are shut-in and four wells have been converted to salt water disposal
wells. The remaining 76 wells have been plugged and abandoned.
17
At West Hackberry, the first discovery well was drilled in 1938 and was
developed by Superior Oil Company (now Exxon-Mobil Corporation) between 1938 and
1988. The estimated cumulative oil and condensate production through 2000 was
170 million barrels of oil with casinghead gas production of 120 billion cubic
feet of gas. There have been 36 wells drilled to date on Gulfport's portion of
West Hackberry and currently one is producing, 26 are shut-in and one well has
been converted to a saltwater disposal well. The remaining eight wells have been
plugged and abandoned.
Activity for the Quarter Ended September 30, 2003
At East Hackberry, during the three months ended September 30, 2003,
Gulfport worked over the existing saltwater disposal facilities at the Erwin
portion of State Lease 50 and Erwin portions of East Hackberry and performed
maintenance on the production facility at East Hackberry.
Total net production per day for both Hackberry fields was 220 barrels of
oil for the three-month period ended September 30, 2003.
Future Activity
Gulfport has received regulatory approval and plans to drill a new
salt-water disposal well on the M. P. Erwin portion of East Hackberry before the
end of 2003. The added disposal capacity provided by the new well should allow
the Company to perform six recompletions and three workovers at East Hackberry.
Castex Back-In
Gulfport sold its interest in the Bayou Penchant, Bayou Pigeon, Deer Island
and Golden Meadow fields to Castex Energy 1996 Limited Partnership effective
April 1, 1998 subject to a 25% reversionary interest in the partnership after
Castex had received 100% of the initial investment. Castex informed Gulfport
that the investment had paid out effective September 1, 2001. In lieu of a 25%
interest in the partnership, Gulfport elected to take a proportionately reduced
25% working interest in the properties. During March 2002, the Company received
approximately $220,000 from Castex which the Company believes consists of sales
income for the period after payout net of operating expenses, although the
Company has not received confirmation of such. As a result, this amount
received has been included in the accompanying statement of income for the nine
months ended September 30, 2003 as "Other Income". The Company received an
additional $66,000 from Castex in March of 2003, which is also included in the
accompanying statement of operations for the nine months ended September 30,
2003 as "Other Income".
18
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2003 and 2002
During the three months ended September 30, 2003, the Company reported a
net loss available to common stockholders of $.098 million as compared to net
income of $.45 million for the corresponding period in 2002. This decrease is
primarily due to the following factors:
Oil and Gas Revenues. For the three months ended September 30, 2003, the
Company reported oil and gas revenues of $4.0 million, an increase of $0.3
million from $3.7 million for the comparable period in 2002. This increase was
due principally to a 9% increase in oil production from 137 MBbls to 150 MBbls
for the three months ended September 30, 2002 and 2003, respectively. This
increase in production was due to the new oil production generated from the
Company's drilling program initiated during the fourth quarter of 2002 and first
quarter of 2003. This was slightly offset by a 4% decline in the net price per
BOE the Company received during 2003 as compared to the same period in 2002.
The following table summarizes the Company's oil and gas production and
related pricing for the three months ended September 30, 2003 and 2002:
Three Months Ended September 30,
003 2002
---- ----
Oil production volumes (Mbbls) 150 137
Gas production volumes (Mmcf) 31 25
Average oil price (per Bbl) $25.79 $26.70
Average gas price (per Mcf) $ 3.18 $ 3.71
Operating Expenses. Lease operating expenses increased to $1.58 million
for the three months ended September 30, 2003 as compared to $1.24 million for
the same period in 2002. This increase was a result of non-capitalized LOE
workovers performed during the period.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased $.19 million from $.87 million for the three months ended
September 30, 2002 to $1.06 million for the comparable period in 2003. This
increase was attributable primarily to an increase in production to 155 MBOE's
for the three months ended September 30, 2003 as compared to 141 MBOE's for the
same period in 2002. In addition, as a result of the adoption of SFAS 143
"Accounting for Asset Retirement Obligations," the amount to amortize increased
by $7.5 million which resulted in additional depletion, depreciation and
amortization. (See Note 11.)
General and Administrative Expenses. General and administrative expenses
decreased $.04 million from $.43 million for the three months ended September
30, 2002 to $.39 million for the comparable period in 2003. This decrease is
due mainly to an increase in administrative services reimbursement due to
additional oversight of related party companies.
Interest Expense. Interest expense increased for the three months ended
September 30, 2002 from $3,000 to $449,000 for the comparable period in 2003.
This increase was primarily attributable to the adoption of SFAS 150 "Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." Previously, the preferred stock offering of March 2002 was classified
19
as a balance sheet item between debt and equity. Under SFAS 150, this amount is
now recorded as debt and the dividends payable under this offering are
classified as interest expense. For the three months ended September 30, 2003,
$429,000 was recorded as interest expense related to this offering. (See Note
9).
Income Taxes. As of December 31, 2002, the Company had a net operating
loss carryforward of approximately $91 million, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately $49
million, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized.
No current tax provision was provided for the three-month period ended September
30, 2003, due to a net loss of $98,000 for the period.
Cumulative Effect of Accounting Change. On January 1, 2003, the Company
adopted Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"), which requires the Company to
record a liability equal to the fair value of the estimated cost to retire an
asset. The asset retirement liability is recorded in the period in which the
obligation meets the definition of a liability, which is generally when the
asset is placed into service. When the liability is initially recorded, the
Company will increase the carrying amount of the related long-lived asset by an
amount equal to the original liability. The liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related long-lived asset. Any difference between costs
incurred upon settlement of an asset retirement obligation and the recorded
liability will be recognized as a gain or loss in the Company's earnings. The
asset retirement obligation is based on a number of assumptions requiring
professional judgment. The Company cannot predict the type of revisions to
these assumptions that will be required in future periods due to the
availability of additional information, including prices for oil field services,
technological changes, governmental requirements and other factors. Upon
adoption of SFAS No. 143, the Company recorded a net benefit of $.27 million as
the cumulative effect of a change in accounting principle. The non-cash
transition adjustment increased oil and natural gas properties and asset
retirement obligations by $7.59 million and $7.37 million, respectively, and
decreased accumulated depreciation by $.05 million.
Comparison of the Nine Months Ended September 30, 2003 and 2002
During the nine months ended September 30, 2003, the Company reported net
income available to common stockholders of $.96 million as compared to net
income of $.59 for the corresponding period in 2002. This increase is primarily
due to the following factors:
Oil and Gas Revenues. For the nine months ended September 30, 2003, the
Company reported oil and gas revenues of $12.5 million, an increase of $3.0
million from $9.5 million for the comparable period in 2002. This increase was
due principally to a 17% increase in oil production from 381 MBbls to 446 MBbls
for the nine months ended September 30, 2002 and 2003, respectively. This
increase in production was due to the new oil production generated from the
Company's drilling program initiated during the fourth quarter of 2002 and
second quarter of 2003. In addition, a 12% increase in oil prices during the
nine months ended September 30, 2003 to $27.13 per barrel from $24.28 per barrel
for the same period in 2002 also contributed to the increase in oil and gas
revenues.
20
The following table summarizes the Company's oil and gas production and
related pricing for the nine months ended September 30, 2003 and 2002:
Nine Months Ended September 30,
2003 2002
---- ----
Oil production volumes (Mbbls) 446 381
Gas production volumes (Mmcf) 98 84
Average oil price (per Bbl) $27.13 $24.28
Average gas price (per Mcf) $ 3.58 $ 3.35
Operating Expenses. Lease operating expenses increased to $4.4 million for
the nine months ended September 30, 2003 as compared to $3.6 million for the
same period in 2002. This increase was a result of non-capitalized LOE
workovers performed during the period.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased from $2.5 million for the nine months ended September 30,
2002 to $3.2 million for the comparable period in 2003. This increase was
attributable primarily to an increase in production to 463 MBOE's for the nine
months ended September 30, 2003 as compared to 395 MBOE's for the same period in
2002. In addition, as a result of the adoption of SFAS 143 "Accounting for
Asset Retirement Obligations," the amount to amortize increased by $7.5 million
which resulted in additional depletion, depreciation and amortization. (See
Note 11.)
General and Administrative Expenses. General and administrative expenses
increased slightly from $1.26 million for the nine months ended September 30,
2002 to $1.35 million for the comparable period in 2003. This increase is due
mainly to an increase in franchise tax expenses accrued during the nine months
ended September 30, 2003. In addition, there were slight increases in salaries
and benefits as a result of several staff additions.
Interest Expense. Interest expense increased from $.1 million for the nine
months ended September 30, 2002 to $.46 million for the comparable period in
2003. This increase was primarily attributable to the adoption of SFAS 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." Previously, the preferred stock offering of March 2002
was classified as a balance sheet item between debt and equity. Under SFAS 150,
this amount is now recorded as debt and the dividends payable under this
offering are classified as Interest Expense. For the nine months ended
September 30, 2003, $429,000 was recorded as interest expense related to this
offering. (See Note 9.) Slightly offsetting that, during the nine months ended
September 30, 2003, there was a reduction in the average debt outstanding as
compared to the same period in 2002.
Income Taxes. As of December 31, 2002, the Company had a net operating
loss carryforward of approximately $91 million, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately $49
million, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. A
current tax provision of $.61 million was provided for the nine-month period
ended September 30, 2003, which was fully offset by an equal income tax benefit
due to operating loss carryforwards.
21
Cumulative Effect of Accounting Change. On January 1, 2003, the Company
adopted Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"), which requires the Company to
record a liability equal to the fair value of the estimated cost to retire an
asset. The asset retirement liability is recorded in the period in which the
obligation meets the definition of a liability, which is generally when the
asset is placed into service. When the liability is initially recorded, the
Company will increase the carrying amount of the related long-lived asset by an
amount equal to the original liability. The liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related long-lived asset. Any difference between costs
incurred upon settlement of an asset retirement obligation and the recorded
liability will be recognized as a gain or loss in the Company's earnings. The
asset retirement obligation is based on a number of assumptions requiring
professional judgment. The Company cannot predict the type of revisions to
these assumptions that will be required in future periods due to the
availability of additional information, including prices for oil field services,
technological changes, governmental requirements and other factors. Upon
adoption of SFAS No. 143, the Company recorded a net benefit of $.27 million as
the cumulative effect of a change in accounting principle. The non-cash
transition adjustment increased oil and natural gas properties and asset
retirement obligations by $7.59 million and $7.37 million, respectively, and
decreased accumulated depreciation by $.05 million.
Capital Expenditures, Capital Resources and Liquidity
Net cash flow provided by operating activities for the nine-month period
ended September 30, 2003 increased to $9.1 million, as compared to net cash flow
provided of $5.9 million for the comparable period in 2002. This increase was
due in part to an increase in the Company's net income to $1.8 million as a
result of an increase in oil and gas sales. In addition, the Company's total
accounts receivable decreased $2.5 million, primarily due to the receipt of the
insurance settlement related to the hurricane in October 2002.
Net cash used in investing activities during the nine months ended
September 30, 2003 was $10.2 million as compared to $7.7 million used during the
same period of 2002. Mainly as a result of the Company's drilling programs
initiated in December 2002 and April 2003, the Company spent $9.3 million in
additions to oil and gas properties. Of this amount, the Company spent $5.9
million on drilling activity and $3.0 million on other workover and recompletion
activities. In addition, another $.7 million was spent on the clean up and
repair of hurricane damage.
Net cash provided by financing activities for the nine months ended
September 30, 2003 was $1.5 million as compared to net cash provided of $4.9
million during the same period of 2002. The decrease is primarily a result of
the proceeds raised in conjunction with the Company's Private Placement Offering
in March 2002.
Capital Expenditures. During the nine months ended September 30, 2003,
Gulfport invested $9.3 million in oil and gas properties and other property and
equipment as compared to $7.6 million invested during the comparable period in
2002. Of this amount, the Company spent $5.9 million on drilling activity and
$3.0 million on workover and recompletions activities. In addition, another $.7
million was spent on the clean up and repair of hurricane damage.
22
During the nine month period ended September 30, 2003, Gulfport financed
its capital expenditures payment requirements with cash flows provided by
operations as well as borrowings under its credit facility.
Gulfport's strategy is to continue to increase cash flows generated by its
properties by undertaking new drilling, workover, sidetrack and recompletion
projects in the fields to exploit its extensive reserves. The Company has
upgraded its infrastructure by enhancing its existing facilities to increase
operating efficiencies, increase volume capacities and lower lease operating
expenses. Additionally, Gulfport completed the reprocessing of its 3-D seismic
data in its principal property, West Cote Blanche Bay. The reprocessed data will
enable the Company's geophysicists to generate new prospects and enhance
existing prospects in the intermediate zones in the field thus creating a
portfolio of new drilling opportunities in the most prolific depths of the
field.
Capital Resources. On July 11, 1997 Gulfport entered into a $15,000,000
credit facility with ING (U.S.) Capital Corporation ("ING"). During 1998 and
1999, there were two amendments to the facility and the maturity date was reset
to June 30, 2000. On June 28, 2000, the Company repaid in full its credit
facility at ING and established a new credit facility at Bank of Oklahoma
("BOK"). Gulfport was advanced $1.6 million on this new facility, which called
for interest payments to be made monthly in addition to twelve monthly principal
payments of $100,000, with the remaining unpaid balance due on August 31, 2001.
On March 22, 2001, Gulfport executed a new note with BOK increasing the
availability to $1,760,000, increasing the monthly payments slightly to $110,000
beginning July 1, 2001 and extending the maturity date to October 1, 2002. All
outstanding amounts related to this note were repaid during 2002.
On June 20, 2002, the Company entered into a new revolving line of credit
with BOK. Under the terms of the new agreement, the Company was extended a
commitment to borrow up to $2,300,000. Amounts borrowed under the line bear
interest at Chase Manhattan Prime plus one percent, with payments of interest on
outstanding balances due monthly beginning August 1, 2002. Any principal amounts
borrowed under the line were due on July 1, 2003. On July 1, 2003, the maturity
date was extended to July 1, 2004. There was an outstanding balance of $
1,500,000 under this credit facility at September 30, 2003.
On May 22, 2001, the Company entered into a revolving line of credit
agreement with Gulfport Funding, LLC, ("Gulfport Funding") which has ownership
in common with the Company. Under the terms of the agreement, the Company may
borrow up to $3,000,000, with borrowed amounts bearing interest at Bank of
America Prime Rate plus 4%. All outstanding principal amounts along with accrued
interest were due on February 22, 2002. The Company paid a facility commitment
fee of $60,000 in connection with this line of credit. This fee was amortized
over the life of the agreement. As of December 31, 2001, the Company had
borrowed $3,000,000 available under this line. On March 29, 2002, the
outstanding balance of this note payable, along with all accumulated interest
due on the note were retired through Gulfport Funding's participation in the
Company's Private Placement Offering as described below.
In March 2002, the Company commenced a Private Placement Offering of $10
million dollars consisting of 10,000 Units. Each Unit consists of (i) one (1)
share of Cumulative Preferred Stock, Series A, of the Company (Preferred) and
(ii) a warrant to purchase up to 250 shares of common stock, par value $0.01 per
share. Dividends accrue on the Preferred prior to the Mandatory Redemption Date
at the rate of 12% per annum payable quarterly in cash or, at the option of the
23
Company for a period not to exceed two (2) years from the Closing Date, payable
in whole or in part in additional shares of the Preferred based on the
Liquidation Preference of the Preferred at the rate of 15% per annum. No other
dividends shall be declared or shall accrue on the Preferred. To the extent
funds are legally available, the Company is obligated to declare and pay the
dividends on the Preferred. The Warrants have a term of ten (10) years and an
exercise price of $4.00. The Company is required to redeem the Preferred on the
fifth anniversary of the first issuance and the Company may at its sole option,
choose to redeem the Preferred at any time before the expiration of the five
years. Accordingly, the Preferred issued in connection with this Offering is
treated as redeemable stock in the accompanying balance sheet.
Two-thirds of the Preferred Stockholders can affect any Company action,
which would effect their preference position. The Preferred cannot be sold or
transferred by its holders and the Company must use its best efforts to register
with the Securities and Exchange Commission ("SEC") the common stock issued in
connection with the exercise of the Warrants or, if possible, piggyback the
issued common stock if the Company participates in a public offering with the
SEC.
The Offering was made available to stockholders (some of whom were
affiliates) of the Company as of December 31, 2001 and who were known to be
accredited investors by the Company. Purchasers were able to participate up to
their pro rata share of ownership in the Company as of December 31, 2001. The
Offering's initial closing began March 29, 2002 and continued until April 15,
2002, with a total subscription of $9,292,000 or 9,291.85 units.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3.0 million dollar loan along with the accumulated
interest due from the Company for 3,262.98 Units. Additionally, on March 29,
2002 entities controlled by the majority shareholder initially funded a share of
the Preferred Offering in the amount of $2,738,000.
As a result of the completion of the NSA engineering report for the year
ended January 1, 2003, the Company has initiated discussions with its current
bank and other banking institutions in an attempt to put in a place a larger and
longer-term revolving credit facility. The Company cannot be sure however that
they will be successful.
The Company is also currently consulting with a financial advisor to
determine how to take advantage of the current markets whether through internal
value creation or a capital markets transaction. In September 2003, the Company
engaged Petrie Parkman & Co., to assist Gulfport in marketing the West Cote
Blanche Bay field. The Company cannot be sure however that this will be
successful.
Liquidity. The primary capital commitments faced by the Company are the
capital requirements needed to continue developing the Company's proved reserves
and to continue meeting the required principal payments on its Credit Facilities
if any.
In Gulfport's January 1, 2003 reserve report, 85% of Gulfport's net
reserves were categorized as proved undeveloped. The proved reserves of
Gulfport will generally decline as reserves are depleted, except to the extent
that Gulfport conducts successful exploration or development activities or
acquires properties containing proved developed reserves, or both.
To realize reserves and increase production, the Company must continue its
exploratory drilling, undertake other replacement activities or utilize third
parties to accomplish those activities. In the year 2003, Gulfport expects to
24
undertake several intermediate drilling programs. It is anticipated that these
reserve development projects will be funded either through the use of cash flow
from operations when available, interim bank financing or related third party
financing, a long-term credit facility or by accessing the capital markets. The
cash flow generated from these new projects will be used to make the Company's
required principal payments on its debt with the remainder reinvested in the
field to complete more capital projects.
COMMITMENTS
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Company agreed to contribute approximately $18,000 per
month through March 2004 to a plugging and abandonment trust and the obligation
to plug a minimum of 20 wells per year for 20 years commencing March 11, 1997.
Texaco retained a security interest in production from these properties and the
plugging and abandonment trust until such time the Company's obligations to
Texaco have been fulfilled. As of September 30, 2003, the plugging and
abandonment trust totaled $2,691,000. These funds are invested in a U.S.
Treasury Money Market.
During 2002, Gulfport began to fulfill its yearly plugging commitment of 20
wells at WCBB for the twelve-month period ending March 31, 2003. As of the date
of this filing, the pluggings have been completed.
In addition, the Company has letters of credit totaling $200,000 secured by
certificates of deposit being held for plugging costs in the East Hackberry
field. Once specific wells are plugged and abandoned the $200,000 will be
returned to the Company.
ACCOUNTING AND REPORTING CHANGES
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or as an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is generally effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company recorded a liability related to the Series A Preferred
Stock of $11,625,000. Previously, the Series A Preferred Stock had been
classified on the balance sheet between total liabilities and equity. This
amount represents the 11,625 preferred shares issued and outstanding as of
September 30, 2003, at the redemption and liquidation value of $1,000 per share.
In the opinion of management, the $1,000 per share redemption and liquidation
value approximates fair value. The shares are mandatorily redeemable on the
fifth anniversary of the first issuance of Series A Preferred Stock.
ITEM 3. CONTROLS AND PROCEDURES
Gulfport Energy Corporation, under the direction of the Chief Executive
Officer and the Vice President and Chief Financial Officer, has established
disclosure controls and procedures that are designed to ensure that information
required to be disclosed by Gulfport in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. The
disclosure controls and procedures are also intended to ensure that such
information is accumulated and communicated to Gulfport's management, including
25
the Chief Executive Officer and the Vice President and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosures.
Within 90 days prior to the filing of this Form 10-QSB, an evaluation was
performed under the supervision and with the participation of Gulfport
management, including the Chief Executive Officer and the Vice President and
Chief Financial Officer, of Gulfport's disclosure controls and procedures (as
those terms are defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon their evaluation, the Chairman and Chief Executive Officer
and the Executive Vice President and Chief Financial Officer have concluded that
Gulfport's disclosure controls and procedures are effective as of the date of
this Form 10-QSB. In compliance with Section 302 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. Section 1350), each of these officers executed a Certification
included in this Form 10-QSB.
As of the date of this Form 10-QSB, there have not been any significant
changes in Gulfport's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
No significant deficiencies or material weaknesses in such internal controls
were identified in the evaluation and as a consequence, no corrective action was
required to be taken.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Gulfport has been named as a defendant in various lawsuits. The ultimate
resolution of these matters is not expected to have a material adverse effect on
the Company's financial condition or results of operations for the periods
presented in the financial statements.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2.1 Form 8-K filed on March 8, 2002 between Registrant and
Gulfport Funding, LLC.
26
10.1 Credit Agreement dated June 28, 2000 between Registrant and Bank
of Oklahoma filed March 30, 2001 (1)
10.2 Stock Option Plan filed March 30, 2001 (1)
10.3 Credit Agreement dated February 1, 2001 between Registrant and
Bank of Oklahoma (1)
10.4 Credit Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.5 Warrant Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.6 Promissory Note dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.7 Confidential Disclosure Statement Relating to Offer and Sale of
Up to 10,000 Units dated March 29, 2002
10.8 Credit Agreement dated June 28, 2000 between Registrant and
Bank of Oklahoma filed March 30, 2001 (1)
10.9 Stock Option Plan filed March 30, 2001 (1)
10.10 Credit Agreement dated February 1, 2001 between Registrant and
Bank of Oklahoma (1)
10.11 Credit Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.12 Warrant Agreement dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
10.13 Promissory Note dated May 22, 2001 between Registrant and
Gulfport Funding, LLC (1)
(1) Previously filed as an exhibit to Form 10-K for the year ended
December 31, 2001, and incorporated herein by reference.
27
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULFPORT ENERGY CORPORATION
Date: November 14, 2003
/s/Mike Liddell
-----------------------------------------
Mike Liddell
Chief Executive Officer
/s/Mike Moore
-----------------------------------------
Mike Moore
Chief Financial Officer
28
CERTIFICATION
I, Mike Liddell, Chief Executive Officer of Gulfport Energy Corporation, certify
that:
1. I have reviewed this quarterly report on Form 10-QSB of Gulfport Energy
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a----14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2003 /s/ Mike Liddell
----------------------------------
Mike Liddell
Chief Executive Officer
29
CERTIFICATION OF PERIODIC REPORT
I, Mike Liddell, Chief Executive Officer of Gulfport Energy Corporation,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that, to the best of my knowledge:
(1) the Quarterly Report on Form 10-QSB of the Company for the quarterly period
ended September 30, 2003 (the "Report") fully complies with the
requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78M or 78o(d); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 14, 2003 /s/ Mike Liddell
---------------------------------
Mike Liddell
Chief Executive Officer
30
CERTIFICATION
I, Michael G. Moore, Chief Financial Officer of Gulfport Energy Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Gulfport Energy
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a----14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2003 /s/ Mike Moore
----------------------------------
Mike Moore
Chief Financial Officer
31
CERTIFICATION OF PERIODIC REPORT
I, Michael G. Moore, Chief Financial Officer of Gulfport Energy Corporation,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350, that, to the best of my knowledge:
(1) the Quarterly Report on Form 10-QSB of the Company for the quarterly period
ended September 30, 2003 (the "Report") fully complies with the
requirements of Section 13 (a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78M or 78o(d); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: November 14, 2003 /s/ Mike Moore
----------------------------------
Mike Moore
Chief Financial Officer
32
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